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Thursday, June 27, 2013

This post relates to Greece only in the sense that Greece is presently completing a restructuring of its banks. The way I understand it, it is not a restructuring which I would support (the NYT writes that some of the major beneficiaries will be those bank managers and owners who had run their banks into the ground).

To be sure, I definitely feel strongly that it cannot be the tax payers who always pay the bill for bailing-out banks which have acted irresponsibly. Thus, I share the EU's objective but I disagree with the proposed implementation. First, my most important point.

No bank can ever be completely safe but depositors put their money into banks and not hedge funds because they have the reasonable expectation that banks are safer than hedge funds. Thus, it is the primary responsibility of governments and/or banking authorities to implement banking regulations which can be deemed to make banks safer than hedge funds.

Basel-3 stipulates that, in addition to minimum capital ratios as per risk-weighted assets, banks must maintain a minimum equity/total assets ratio of 3%. Banks like Deutsche or BNP today have an equity/total assets ratio which is closer to 2% than to 3%. Mind you, this is the on-balance sheet ratio. If off-balance sheet items were included, the ratio would be even lower. A 2% equity/total assets ratio means that a bank has total assets of, say, 100, total debt of 98 and total equity of 2. Should all the assets depreciate in value by only 2%, all the bank's equity would be wiped out.

A 2% equity/total assets ratio is equivalent to a leverage of 49:1. If off-balance sheet items were included, the leverage would be accordingly higher. A hedge fund with a leverage of 49:1 would be considered a very highly-leveraged (high risk) hedge fund. Typical depositors would never put their money into such a high-risk venture. Instead, they put their money into a bank thinking that a bank, while never completely safe, will be much, much safer than a hedge fund. Are Deutsche, BNP & Co. safer than a hedge fund? The numbers would suggest, no! They are only safer in the sense that they can still count on the implicit guarantee of their governments.

So, the EU is essentially saying to depositors: "We know that policy makers have allowed large banks to become as risky as hedge funds but, sorry, if those bank-hedge funds fail, you have to foot part of the bill!" The depositor who wants to put his money into a large bank which is safer than a hedge fund won't find one. The depositor has essentially been transformed into a hedge fund investor (except for the fact that, with a bank, he has the first 100 TEUR insured by the government whereas with a hedge he has no insurance at all).

This is nothing other than focusing on repair instead of prevention. A focus on prevention would require to first make banks safer than hedge funds and then require savers to pay part of the bill in case of failure (which failure is then less likely).

The book The Bankers' New Clothes, the authors argue that there is absolutely no reason not to require banks to increase their equity/total assets ratio to 15-20%, at least. That would still not guarantee that there will never be bank failures but it would definitely increase the bank's cushion which is available to absorb losses.

A courageous position on the part of the EU would have been to say something like the following: "We recognize that many of our large banks are hopelessly undercapitalized. We will require banks to increase their equity/total assets ratio to 15-20%. Until they reach that level, banks will have to discontinue paying out dividends and bonuses will be subject to review/approval of the respective national banking authority". That would send the right message across.

The other question which is not clearly addressed in the EU's proposal is: who determines (and how?) when bank failure has occured and the liability chain comes into force? Clearly, a really bad bank has to be closed right away and bankruptcy laws make a new liability chain unnecessary. But what about all the other banks, particularly the TBTF-banks?

I would argue that if European TBTF-banks were required to make a 'true' mark-to-market excercise, few of them would still be open for business afterwards. Their exposures to the so-called risk-free assets (government bonds) is just too large to withstand the need for a write-down in the order of, say, 25%. Thus, it would theoretically be possible for authorities to declare banks like Deutsche, BNP & Co. as having failed and to set the liability chain in motion.

Moreover, if a bank is deemed as having failed on the day when it no longer can refinance itself in the market, the distinction between illiquidity and insolvency becomes blurred. In the case of HypoRealEstate, illiquidity was definitely tantamount to insolvency. What if BNP faced a temorary liquidity crisis? Would it be deemed to be insolvent right away?

In summary: there is a huge risk that the liability chain comes into force without a bank really having failed and before such a determination can be made. This would lead to the situation where existing depositors share in a loss which may eventually not be a loss at all, in which case the benefit goes - unjustifiably - to the new shareholders.

The final cost of rescuing a bank is only known when the rescue has been completed and the final tally is made. That normally takes years. To protect depositors from unjustly sharing in the damage, there should not be an immediate cut of their deposits. Instead, their deposits should be frozen until such a time when the final tally can be determined. At that point, they will find out whether perhaps they have to take no losses at all or perhaps lose a lot more than the proposed 8%.

Friday, June 21, 2013

Would the Greek economy take off if only Germany were to increase
aggregate demand? Would it take off if Greece returned to the Drachma
and made its exports cheaper?

A Chinese proverb says
'You cannot draw water from a dried-out well'. Let's take a look at
Greece's productive capacity to get a feeling for the export explosion if
one of the above events were to occur (*).

Foodstuffs

5,9

BEUR

Metals

3,1

BEUR

Minerals

2,4

BEUR

Cement

1,1

BEUR

Dinks

1,5

BEUR

Metalworking

1,3

BEUR

Chemicals

1,0

BEUR

Plastics

1,0

BEUR

Pharma

0,9

BEUR

Concrete

0,7

BEUR

Printing

0,7

BEUR

Electronics

0,6

BEUR

Clothing

0,5

BEUR

Machinery

0,3

BEUR

Optics

0,1

BEUR

Vehicles

0,1

BEUR

By all standards, these are minute numbers. Greece's entire machinery industry would represent a medium-size company in Germany, at best. So where are all those productive capacities which would explode if only foreigners bought more from Greece?

They aren't there. Which is why it is somewhat moot to philosophize about all the things which might happen if only there were new demand for Greek products. Not much would happen because Greece does not produce much.

Which brings me to my eternal, often-repeated point: a long-term economic development plan is necessary to build up a productive sector in Greece. Not multinational giants. Instead, hundreds and hundreds of small to medium-size productive companies.

Which brings me to my next eternal, often-repeated point: only through foreign investment can Greece manage to bring this about. Greece wouldn't have the know-how to accomplish this on its own (at least not within the timeframe required). Thus, Greece simply MUST focus on attracting foreign investment in the above industrial categories. There is no other way about it.

Greece's domestic economic value creation, never large to begin with, has tumbled during the Euro-party. If economic value creation is not brought back to Greece, there will not be the necessary employment, neither the necessary income taxes and social contributions and neither the revenues for the state. Just as simple as that!

Thursday, June 20, 2013

Greece's creditors have debt maturities of 3,7 BEUR in 2013-14 and 1,9 BEUR in 2015-16 coming up. Under normal circumstances, one would expect the borrower to simply redeem the debt when it falls due. In practice, most borrowers never redeem their debt. Instead, they refinance it.

Anyone who thinks that Greece could really achieve a net reduction in debt should go back to Algebra 101. I mean, where should the money come from?

In a normal financial restructuring, creditors always keep shorter maturities on part of their debt. Why? Because every time a maturity comes up (and the borrower obviously can't repay), it gives creditors the chance to negotiate something. Either compliance with an agreement already in place or a new agreement.

Suppose a regular borrower had 5,6 BEUR maturities coming up in 2013-16 with 10 private banks. The borrower would simply invite the 10 banks to negotiate the terms for roll-over. The banks state their terms, the borrower checks acceptability, perhaps negotitates a bit, and off they all go. No big deal (unless there is a snag).

Of course, one of the banks could refuse to play ball and instist on actual redemption. Well, that poor bank will come under enormous pressure from all the other banks.

So why is it so difficult in the case of Greece? First of all, because those maturities are not bank loans. They are bonds and there is no way to simply roll-over bonds. The only way to achieve a roll-over with bonds is to issue new bonds in repayment of maturing bonds.

And here comes the catch. A good chunk of those bonds is held by the ECB. If the ECB accepted new bonds in repayment of maturing bonds, that would be considered as direct government financing and - ouuch, you guessed it: the ECB is not permitted to do direct government financing.

So, here we go. Something like a catch-22. We will see seemingly endless negotiations; a lot of back-and-forth; a lot of exchange of position papers; etc. At the end of the day, and I venture to say that this is certain, one will have agreement to roll-over the debt in whatever technical form permissable.

And if it were private bank loans instead of bonds from official bodies? Well, I guess one conference call among the 10 banks, if well prepared and if there is no snag from the borrower, would take care of this issue.

Sunday, June 16, 2013

This videopodcast (in German) explains brilliantly Greece's export situation and the (small) impact which a lowering of Greek unit production costs will have on export growth. Bottom-line: if there is only a very small industrial base (like in Greece), even the lowest unit production costs will not have much of an impact.

Then, a daring comparison with the German state of Mecklenburg-Vorpommern is made. M.-V. does not have an industrial base either; in fact, very little manufacturing. And they are not strong in services either.

Thus, M.-V. has a large current account deficit with the rest of Germany. The author asks the following key questions: if Germany still had the DM as its local currency, (a) would one consider expelling M.-V. from the DM-zone? (b) would a lowering of wages in M.-V. serve any purpose?

His answer is: of course, not! Even though M.-V. would be the 'Greece of Germany' in that context, no one would have a problem with that. So, he carries on, why does the Eurozone have a problem with Greece's not being able to produce enough?

Admittedly, that logic seemed so convincing that it required some thought on my part. Having collected my mind, I asked the author the following 2 questions:

1) if M.-V. does not create enough economic value (products, services) on its own, what impact does that have on employment there? And
2) how high is the exodus of people from M.-V. to other states of Germany?

The author hasn't responded but the answers are clear: M.-V. has one of the highest unemployment rates in Germany (about 14%) and the exodus to the rest of Germany has been enormous (particularly among the young).

Is that the future which is in store for Greece? Yes, it is. Unless Greece manages to increase its economic value generation (products, services). One aspect could be to bring economic value generation back to the country by substituting imports. Another one would be to follow the recommendations of McKinsey's report Greece Ten Years Ahead. There are many others. But something needs to be done if Greece is not to have the future of M.-V.

To me, foreign investment is the key. How can one expect Greece to build up a light industrial sector when it never had one? The only way to deal with this situation is to bring those investors to Greece who know how to do it and who can develop the Greek economy accordingly.

Having followed the various reactions to and analyses of the ERT-shutdown, I am still stuck with my previous position that it is not only the 'what' which matters but, particularly in today's Greece, the 'how'. And the 'how' was deplorable.

And then there is the 'why'. Why would a Prime Minister, allegedly almost single-handedly, do something which Nick Malkoutzis described so well as 'sparking the three-party government’s worst crisis
since its formation, getting the world talking about Greece as a basket
case again, making tourists wonder what strikes they might face during the
summer and suddenly handing SYRIZA, which had started stagnating in
opinion polls, a cause around which to rally people'.

Cui bono? Perhaps that is the question to ask.

If Greece has, in about 2-3 months from now, a new public broadcasting network which is lean and mean and of outstanding quality; which is totally free of political influence; which commands the respect of Greek viewers; etc. Well, if that happens, then one might be able to argue that the end justified the means. Fat chance of that happening.

If that does not happen, then all the negatives which Nick Malkoutzis mentions come into full force. They might blow away over time but I doubt it. There are things which never blow away. Pinochet's coup will never blow away regardless of the economic success which followed it. A Polytechnion will never blow away. The sudden shutdown of a public broadcaster could become one of those things which will never blow away.

A good captain on a weak ship will try to sail around any storms which appear on the horizon. If a captain on a weak ship steers directly into the storm (or even looks for one!), his officers and sailors will not be very happy with him. He may eventually manage to sail through the storm but he will rightfully be accused of reckless behavior.

And then there is also the chance that the ship goes under in the storm!

Wednesday, June 12, 2013

Little Willie had been trying for over an hour to make his donkey move; the donkey didn't move. Big Bill came along. "Boy", he said to Little Willie, "you're doing it all wrong! You gotta reason with the animal!" Defiantly, Little Willie challenged Big Bill: "Ok, you show me how to reason with an animal!" Big Bill took a heavy 2x4 and hit the donkey on the back with full force. The donkey jumped forward. "Wait a minute!", Little Willie cried, "you said you would reason with the animal!" "Yes," Big Bill replied, "but before you reason, you gotta get his attention!"

The Greek government may not have used a 2x4 but it sure got everybody's attention. There have been many occasions in the last 3 years where I wondered why a Greek PM wouldn't use motivating phrases like "Who, if not us? When, if not now?" Apparently, there are now over 2.500 ERT employees who are asking "Why us? Why now?" Those are good questions!

One could view this as a smart political move or a dumb one. Smart, because it is highly unlikely that ND's coalition partners would risk the fall of the coalition government: they would most likely come out of new elections even weaker than they are now. From that standpoint, Mr. Samaras seems to be able to get away with bloody murder (nearly!).

But it seems dumb to use one's political strength for an action which simply is unworthy of a democracy of the First World. One does not shut off a public broadcasting network (or any major media) just like that. It simply is not hygienic in a democracy. It simply sends the wrong signals. It simply is not very sensitive.

Having said this, it is worthwhile to ponder the new method which the government seems to be flirting with. That method being: instead of attempting to reform something which cannot be reformed, eliminate it altogether and start all over again with a fresh start.

That method has been applied to companies, to larger institutions and even to countries: Charles de Gaulle considered the 4th Republic as non-reformable. So he created the 5th Republic and got a new constitution implemented. There have been suggestions not too long ago that even Greece as a country might want to consider a re-launch: a new constitution and perhaps even a new name (a German member of the EU parliament, of Greek origin, had suggested the name "Hellas" for the new Greece).

I would argue that there are social systems, particularly public institutions (perhaps even ministries) which cannot be reformed from within. Either because they are so large or so complex or so rotten. Social systems typically have established formal or informal defense mechanisms to assure their survival; to resist change. There, the method of tearing down and starting from scratch may indeed be a useful method for the simple reason that is so much easier to start something from scatch than having to continually improve something which has existed for ages.

BUT! The successor institution must be in place before the existing one is being dismantled. The successor institution must be up and running as soon as the existing one ceases to exist. AND: there must be due deliberation and a democratic decision-making process instead of simply an edict. If these rules are adhered to, there would be nothing wrong with applying that method even to a public broadcasting network. A new Greek Public Broadcasting Network (GPBN) would have to be in place so when ERT is turned off at midnight, the GPBN starts operating right after midnight. And no one is taken be surprise.

The procedure followed by the Greek government in the case of ERT will leave deep scars in Greek politics for some time to come. Hopefully it will only be scars! But if one wants to get something positive out of this deplorable procedure, one should explore how the procedure should be amended so that it could be applied in other cases in a democratically legitimate way.

Tuesday, June 11, 2013

I am going through the same experience as I did last September when the German Constitutional Court (GCC) announced to publish its Preliminary Ruling: the very smart people of the media, blogosphere and twitter world again get all excited about this rather abstract event. This commentary from Bloomberg's even goes so far as to suggest that 'Germany's constitutional court in Karlsruhe will this week determine the fate of the euro'.

Come on! Who is trying to drive whom crazy here? What does all of this have to do with the necessary balancing of real economic activity within the Eurozone?

First of all, one should bear in mind that there already has been a Preliminary Ruling and that it is highly unlikely that a Final Ruling would change the results of the Prelimary Ruling. That result was: the ESM is in compliance with the German Constitution (with a couple of attached provisos).

The only question left unanswered in the Preliminary Ruling was whether the ECB's OMT-operations were in compliance with EU laws. Even if the GCC ruled that they weren't, it still has no jurisdiction over the ECB. Such a ruling would have to be passed on to a European Court for judgment.

Somewhere it was suggested that the GCC could rule that Germany has to exit the Eurozone. That certainly made good reading! But don't these people know that courts go by principle and precedent? The precedents of the GCC suggest that they will adhere to a "yes, but..." strategy. And that's probably the smartest thing to do, anyway.

I wish all these very smart people would use their brains to come up with proposals as to how a balancing of the real economies within the Eurozone could be achieved other than by reverting to tricks of monetary policy all the time.

Monday, June 10, 2013

"None of those who have a desire to enjoy life wants to be a German. At least we (the French) are happy to have children. There will be more French than Germans in 15 years. The 'German model' is not fit for people who enjoy living. Germans are poorer than the average, their life is shorter, they don't want to have children and foreigners are leaving Germany because they don't want to live with Germans".

Sunday, June 9, 2013

One of our neighbors invited me to visit his company in an industrial park outside Kilkis. Our neighbor is well to-do; he doesn't keep his company for financial reasons but for other motives.

For me, it was a bit like watching the movie Titanic. One moment, you saw the shipwreck at the bottom of the ocean and the next moment, David Cameron converted it visually to the luxury liner which it once had been. I looked around at what I saw, an Industrial Cemetery, and simultaneously I imagined what it once must have been, a thriving Industrial Park. And then my brain went into overdrive with questions what would need to happen to return it to a thriving Industrial Park.

It is a quite large industrial park. The entrance road leads to a large gate with a small house and a guard inside. A bit like entering the HQ of the CIA. I imagined that, many years ago, the guard was probably quite busy checking the arrivals and opening/closing the gate. Today, the guard seemed to be happy to see a car coming by and he simply waved us through.

It was hard to tell whether all companies located in the park had gone out of business. I guess one or the other was still in operation but it certainly looked like all had gone out of business. During the time of our visit, I did not see one other human being around. Overall, the park looked like in the TV documentation "One million years after mankind disappeared". Well, maybe not one million but certainly quite a few years.

Our neighbor's company makes heating units as they are used in toasters, grills, stoves, etc. At its peak, over 60 people worked there. The work stations are still all there but total staff today is down to a grand total of three. Had this been the result of the crisis? No, our neighbor said. It was the Chinese who caused the decline. The Chinese came with the same products but at only one-tenth of the price. Hard to believe but that's what he said.

I remembered a similar visit to a similar company in Salzburg almost 20 years ago. A very prestigious company with a very prestigious ownership family. The only problem was that they had started making losses. I had asked an expert to come with me to assess the company's future. The expert looked around and, after only a short time, he said to the owner: "You know, virtually all this production will be in Slovakia & Co. in a few years' time". The owner refused to believe it. He should have.

What had the expert advised? To move all the standard production to Slovakia as soon as possible and to keep in Salzburg only those functions which the Slovaks could not (yet) perform in a satisfactory way: R&D, product development, prototype production, marketing, sales, etc. Had the owner accepted this advice, he would not have gone bankrupt a couple of years later.

That was force majeure then in Salzburg and it seems to be force majeure today with our neighbor's company. No point in hanging on to an activity when the underlying business model has lost its raison d´etre. Our neighbor understood that but, as I said, he wasn't hanging on to his business because he needed to make money.

But what could be a new business model which would return the area into a thriving industrial park? I couldn't come up with any facts but I certainly had a few dreams.

I dreamed that one could declare the entire area as a Special Economic Zone (SEZ). An SEZ with its own economic framework and regulations, all of which such that an investor would consider it as an optimal place to do business. Perhaps a one-stop process where the investor is promised that he can get all necessary permits within a maximum period of, say, 90 days. Perhaps free labor negotiation between investors and employee representations. Perhaps a communal commitment to get the infrastructure back into shape. Perhaps a commitment that earnings re-invested into tangible assets are exempt from taxation. Etc., etc. etc.

It wouldn't seem so difficult to turn the area into an optimal place to do business (provided the will was there!) but who would want to open an operation there and for what purpose?

This is where, in my opinion, smart brains in places like a Ministry of Economics or a think tank or a consulting firm are called for. Someone would have to figure out what type of products would find a market if they were produced there at internationally competitive levels of productivity and costs. A market either in Greece or outside the country (exports). What comes to mind first of all are products which Greece presently imports but which could just as well be produced in Greece if only there were competitive business conditions.

Now suppose that these smart brains would identify a dozen such products. They could then develop business plans for new operations with financials which show realistic revenues, expenses and profits. And profits at a level which makes for an attractive return on the investor's investment. They could go public with those business plans and invite bids from potential investors.

Would a foreign investor trust those business plans? Probably not. The foreign investor would probably fear that Greece could change the promised rules of the game any time it wants to. He might also be worried that Greece might eventually exit the Eurozone, thereby devaluing his investment.

But what if Greece came up with a new Foreign Investment Law; a law of constitutional rank so that it cannot be changed any time of the day? What if that law guaranteed the foreign investor all those terms and conditions on the basis of which he makes his investment? What if the law also protected the foreign investor against the risk of a Grexit?

I suppose the foreign investor would still not trust the situation. After all, how could Greece protect him against a Grexit?

Wait a minute, isn't Greece a member of the EU? Doesn't the EU have an interest that investments are spread more evenly throughout the EU so that employment within the EU is more balanced than it is today? Wouldn't that be enough of a reason for the EU to issue guarantees for the political risk of such investments? Guarantees which give investors the security that, if Greece should ever change the terms of the law (or even grexit), he can get his money back from the EU?

If the EU issued such guarantees, it would have all the rights in the world to audit the SEZ on a regular basis to check compliance both on the part of Greece as well as on the part of the foreign investor. If Greece started to fiddle around with the law, the EU could threaten to withdraw all financial support. If the foreign investor tried to pull fast ones by adopting 'Greek ways of doing business' (corruption, cheating on labor agreements, etc.), the EU could simply terminate its guarantee. Would any investor want to take the risk of losing that protection? I doubt it. Much more likely, the investors would adhere to transparent business practices and thereby become role models for the rest of the economy.

Actually, if such an SEZ works well, it by itself could become a role model for the rest of the economy. If the rest of the economy sees that things are going very well in an SEZ, the rest of the economy might be motivated to copy the economic framework applied there. The rules of the game within an SEZ might rub off on the rest of the economy over time.

Who could be such foreign investors? Let's not dream that true foreign investors would immediately jump on the opportunity to open up an operation in Greece. They probably wouldn't.

But remember! Don't Greeks themselves have a lot of money stashed away in foreign bank accounts? How much do they earn on that in, say, Switzerland these days? 2%? 1%? Perhaps even less? What if they saw that they could earn, say, 10% on some of their money by investing in an SEZ? Greeks recognize a good business opportunity when it presents itself. Wouldn't it be fair to assume that Greeks would soon recognize that there are good business opportunities in an SEZ?

Now to a very serious point. The rest of the EU might scream 'foul play'; 'distortion of competition'; etc. Yes, they probably would. They might even find reasons to sue the violation of EU treaties before a European Court.

Before they sued, they would be well advised to think this through. If the Greek economy does not get back on its feet and generate more economic value that it does today, the EU will have little choice but to send money to Greece on an ongoing basis. Remember the term 'transfer union' which scares the daylights out of every German? Could it not be explained to every German that the cost to his own pocket is much lower when Greece is helped to become a value-generating economy than it would be if Greece remained an economic basket case?

The cost to EU tax payers of a model as described above is no more than a few signatures on a guarantee. No tax payers' monies would have to flow to Greece. Instead, private investors' monies would do that. And the more investors' monies flow to Greece to finance profitable investments there, the less the risk of a future Grexit.

As monies flow to Greece for new productive investment, employment will go up. Remember! When employment goes up, so do income taxes and social contributions. And, by golly, the state's revenues go up as well!

So much for my dreams. We spent a couple of hours with our neighbor getting more and more depressed. When leaving, I asked myself whether my dreams had a realistic chance of ever becoming true. My brain said 'of course!' My gut said 'probably not!'

Saturday, June 8, 2013

"There he stood in the main conference hall of the Interlaken Congress Center and presented himself as an Elder Statesman. Dressed in a suit of fine yarn, the former Prime Minister of Greece, whose family had guided the destiny of their homeland into the wrong paths many years ago, gave at the Swiss Economic Forum (SEF) advice not so much to his own people but rather to the Europeans, advice as to how the Old Continent could achieve an economic turn-around. One had to rub one's eyes and wonder why he had not implemented his 'wisdoms' while he was Prime Minister. It was only the financial markets which eventually showed Greece that it had lived beyond its means and that it was no longer competitive - resulting in Mr. Papandreou's removal from office in 2011. Sadly, Mr. Papandreou did not care to discuss his own contribution to Greece's downfall. Rather, his country had meanwhile become the herald of reforms and for this reason, the rest of Europe would now have to move to help the periphery back on its feet.He has no sympathy for austerity and the Amercan-born could not help but to mention the Nazi past of Germans in Greece. Tax competition within the EU cannot work and the Northern EZ countries have to increase their spending and wages in order to boost aggregate demand in the common currency area. Not to mention the need for community bonds in the Euro
countries ("Euro Bonds") to prevent the insolvency of states and to
ensure the survival of the single currency. The modern Greek version of the Sun God pointed his finger at others at the SEF. The real Greek tragedy is the deeply rooted 'larmoyanz' (*) and the lacking will of the former ruling elite to admit their mistakes".

(*) I checked the word 'larmoyanz' in the dictionary. It means: oversensibility bordering on whining and excessive self-pity.

Personally, I had fallen victim to Mr. Papandreou's charisma, his ability to eloquently express himself in English and his polished demeanor for quite some time. I thought that, deep down, he had a Master Plan and everything else was just appearance to cover up his true (and tough!) strategies versus Greece's funders and creditors.

In fact, I had considered his referendum idea as a unique negotiating ploy. The referendum idea would test the nerves of Merkozy and before they lost them, Mr. Papandreou would offer to retract the referendum if the Troika offered a 2-digit BEUR figure for investments in the Greek private sector. Before that meeting in Nice, I had written that we would now see whether Mr. Papandreou was a Margaret Thatcher or only 'the son of his father'. Sadly, it turned out that he was only the son of his father.

I just came across the below interview which Mr. Papandreou gave on the Canadian TV program The Agenda earlier this week. After watching the full 31 minutes, I could understand again why I had fallen for the man. He does indeed carry off a good show. Sadly, it was a show and no more.

Thursday, June 6, 2013

Well, the IMF now has spoken and it was a remarkably straightforward assessment, indeed! Above all, it didn't shy away from a critical self-assessment. It is certainly surprising that the IMF would have come out with such a critical self-assessment. The content of what they have now put on record should not surprise at all!

Everyone who has ever been involved with external payment problems of a country knew by early 2010 that a 'run on the country' was in the making in Greece. The run had actually started back in 2008 when foreign banks began calling their short-term lines for Greek banks. In other words, they began reducing their Greek exposures. By late 2009, it only required a spark to turn this into a real run, and that spark was the new government's accouncement that the budget figures needed to be restated. By early 2010, it had obviously become a case of 'game over'.

Everyone knew that. Everyone, I should add, except EU-elites.

A run on a country cannot be stopped by strong expressions of support by politicians; or by a 110 BEUR financial commitment. By year-end 2009, Greece's foreign debt was close to 400 BEUR. To stop that run, the financial commitment would have had to be for 400 BEUR plus a commitment to finance all further cash needs of the country.

Barring such a financial commitment, a run on a country can only be stopped if it is stopped in its tracks. That would have entailed an immediate stop on all foreign debt service and the initiation of negotiations to restructure the existing foreign debt of the entire country (not only the sovereign debt). When Angela Merkel announced that 'if Greece fails, the Euro fails and if the Euro fails, the EU project will fail', she irreversibly opened the door to the unfortunate development which has taken place since then. I once wrote an article that the EU-elites would deserve a Nueremberg-trial for that irresponsible decision.

The IMF now admits that Greece's debt should have been restructured right away. This is mistakenly interpreted as meaning that Greece should have been forgiven a substantial portion of its debt right away. A debt restructuring and a haircut are two separate things. A debt restructuring can involve a haircut but it doesn't have to. In the case of Greece, an EU-member and thus a country of the First World, a haircut should never have even be considered at the time.

To make a haircut on sovereign debt at the outset of a crisis, particularly if it is a First World country, is a terrible precedent of gigantic proportions whose long-term effects cannot be foreseen. If there had been a one-time catastrophy, it might have been different but Greece was not a case of a one-time catastrophy. Such a haircut may be considered after 10 or 20 years of unsuccessfully battling an economic crisis but not at the outside. Among other reasons, because there are better ways to accomplish the same effect.

Thus, what the IMF calls a 'restructuring' should have been a straightforward 'rescheduling' of debt. As the Chief Economist of Citibank later stated in an interview: "The Europeans did not know that, outside Europe, debt reschedulings of
sovereign debt with existing creditors have come a dime a dozen in
recent decades”. Citibank is probably the most experienced player in the field of sovereign debt reschedulings.

The overriding principle of a debt rescheduling is that 'risk takers must remain risk carriers'. I. e.: every creditor must keep the risk which he already has. All he does is to extend the maturities of debt and interest payments.

What about the issue Greece's debt not having been sustainable back in 2010? Well, one takes the amount of debt which is deemed to be non-sustainable; for example all debt over 50-60% of GDP. And then one refinances that non-sustainable debt with a very long-term bond (at minimum 30 years) and with interest capitalization. Put differently, Greece would have not have had to make any service on that debt for at least 30 years.

Why would creditors have accepted that? For a very simple reason: because it is far better than a haircut! Once a haircut is made, the creditor has forgone all his claims. When he accepts a new 30-year bond with interest capitalization, that bond may trade near zero at the outside but the creditor retains a legal claim (and the bond might increase in value if Greece were to turn into an economic miracle in the next 30 years).

Who would have been the beneficiaries of that? Not really Greece because the country's debt wouldn't have changed (only much of its service would have been deferred). The beneficiaries would have been the European tax payers! Instead of sending 247 BEUR to Greece (which they have done since then), they would have had to send only 40-50 BEUR. Why? Because that was the part of the 247 BEUR which actually stayed in Greece. The rest was immediately recycled for foreign debt service.

Put differently, European tax payers could not have been misled that Greece needed 'hundreds of BEUR'; European electorates would have shown much greater understanding for supporting Greece. European tax payers might still have had to come up with the remainder of the money to bail out their banks but that would have had two very favorable consequences: European tax payers would have had transparency as to what they were really financing and, secondly, they would have received something in exchange, namely equity in those banks which would have had to be saved.

Instead, what happened was: the EU used Greece's balance sheet to bail out its banks and they called that 'help for Greece'.

Does that have anything to do with the infamous austerity and the collapse of the Greek economy which it allegedly caused? Not really! I do not accept the argument that Greece's pain would have been diminished if there had been less austerity. An economy does not work based on scientific rules where it can be projected what happens, if... An economy works very much on the basis of expectations. If less austerity had lead to more optimistic expectations on the part of Greeks, less austerity might indeed have done the trick. However, I argue that it was expectations which 'killed' the Greek economy. The Greek economy had become such a basket case by 2009 that expectations for a turn-around simply weren't there. Not internationally; neither domestically.

Greece had a budget deficit of 15% in 2009 and a primary deficit of 10%. Now, if that is not a fiscal stimulus, then I don't know what is. And yet, Greece's GDP declined by a little over 3% in 2009! How much more stimulus than that could have stopped the decline which occurred when expectations fell apart?!?

The IMF is very vague when it comes to suggesting how Greece's pain could have been diminished. They insinuate that if structural reforms had been implemented, etc. etc., then private sector growth would have come about automatically. Well, that sounds like an illusion because when expecations work against it, there is no hope.

I have always been very clear on what should have been done. With unavoidable austerity in the public sector, there would have had to be an enormous push for growth in the private sector. For example: an immediate long-term economic development plan for the Greek private sector. If for no better alternatives, the implementation of the Greece Ten Years Ahead plan proposed by McKinsey. Who would have had to finance the implementation of that plan? My answer was/is: private foreign investors.

If offered a good Foreign Investment Law and if offered security that the Foreign Investment Law would be honored by Greece at all times (i. e. an EU-guarantee for the political risk, including the risk of a Grexit), foreign investors would undoubtedly have come.

Accompanying measures would probably have been some form of special taxes on imports to stimulate domestic import substitution ('infant industry protection'), some form of export promotion and, in all likelihood, at least temporary capital controls. All violations of EU-treaties? Yes, indeed. But considering how many EU-treaties have been violated in the past 3 years at enormous cost to all, this would have been a fairly acceptable violation because it would have supported a long-term plan. And, an EU-guarantee for the political risk would have cost the EU but a few signatures.

Short of a bold new private sector initiative, one would be inclined to agree with Prof. Paul Krugman when he says 'in that case you have to wonder whether it was worth trying to keep
Greece in the euro at all. “Grexit” would have been ugly, and will still
be ugly if it eventually happens. But compared with what has actually
taken place?'

ADDENDUM AS OF JUNE 8The
IMF’s Ex Post Evaluation (EPE) has been generally interpreted as a complete mea
culpa on the part of the IMF with a complete culpa assigned to the EU. Greece
was said to come out of it as the victim of having been used as a ginny pig.
Against this background, it is noteworthy to pay attention to the following
quotes from the EPE.

From
the Executive Summary

“Competitiveness
improved somewhat on the back of falling wages, but structural reforms stalled
and productivity gains proved illusive”.

“The
depth of ownership of the program (on the part of Greece) and the capacity to
implement structural reforms were overestimated”.

From
the Report

“Some
argue that Greece was the country that gained most from euro adoption.
Government interest expense dropped from 11,5% of GDP in the mid-1990s to 5% of
GDP in the mid 2000s. These savings were more than swallowed up by increased
spending on wages and pensions. The general government deficit reached 15,5% of
GDP, up from 4% in 2001 (i. e., ceteris paribus, without the direct fiscal
dividend of lower interest expense, the deficit comparable with 2001 would have
been 22% in 2009!)”.

“Tax
administration reforms encountered setbacks due to political resistance and
capacity constraints. There were few signs by the end of the first program that
collection efficiency was being improved on a permanent basis”.

“Labor
market reforms were initially judged to be progressing well, but a more
critical view was taken in later reviews. The absence of early actions to
reduce private wages may have aggravated the job losses from the economic
downturn”.

“The
product markets and the business environment failed to generate critical mass
necessary to boost growth. Progress was disappointing and militated against
realization of the productivity gains that had been hoped for”.

“Confidence
was badly affected by domestic social and political turmoil. Some of the
adverse political developments followed from limited ownership of the program”.

“The
burden of the program was not shared evenly across society. Specific plans to
downsize the number of civil servants were limited to a commitment to replace only
20% of those who retired. The state enterprises also remained generously
staffed”.

“Ownership
of the program was limited. Vested interests had fiercely opposed structural
reforms in the past. Little progress was made with politically difficult
measures such as privatization, downsizing the public sector and labor market
reforms”.

In internal profit center presentations during my banking career, we often used the well-known phrase 'don't believe any statistic which you haven't forged yourself!'. Well, I haven't forged the statistics in this blogpost myself so I can't vouch for their validity...

The statistics show the pryramid of recipients of IKA-pensions assigned to ranges of their monthly pension. Bottom-line: 72% of all recipients have a pension which is in the range up to 800 Euros per month. When increasing the range up to 1.400 Euros per month, 95% of all recipients are included. Put differently, only 5% have a pension above 1.400 Euros per months.

Tuesday, June 4, 2013

I have, on many occasions, stated my opinion that the Cosco investment in Piraeus is the prototype of foreign investment which Greece needs: tripling business volume in the first 2 years of operations in the midst of an overall economic depression; investing several hundred MEUR into a new port; expected to add 2,5% to Greece's GDP by 2018.

Not so in other publications. The blog of Leonidas Vatikiotis invested over 2.000 words into explaining why the Cosco investment is just one perfect example of introducing 'Chinese sweat shop standards' into the Greek labor market. It is an interview with a so-called 'disgruntled employee'. A former small businessman who had gone bankrupt and who was looking for a job in a depressed labor market. He landed a job with Cosco. Hardly on board, he decided not to work for management but, instead, against it. By all normal standards, a sure approach to get fired; which he did. And now he is letting off steam. By all normal standards, a standard reaction.

Why does no one explain in detail what Cosco really did so far? Wouldn't a foreign investment which might contribute 2,5%% to GDP in 5 years from now deserve detailed analysis? Is it really a prototype for what Greece should focus on or is it a text book example of what Greece should stay away from?

It is really quite amazing how much discussion takes place on rather irrelevant issues and how much really important issues are literally being ignored!!!

I am amazed how many learned people have deemed it necessary of late to debate in most sophisticated ways whether Greece can, at this time, be called a success story or not? Whether Greece has turned the corner or not? Why irrelevant at this time? Because it is far too soon to tell!

Let's begin with a few facts: Greece's GDP continues to shrink and the first month of growth, originally promised before Y/E 2013, does not seem to be in sight. Greece's unemployment rate is well over 25% and no one sees it declining any time soon. And, finally, as Nick Malkoutzis pointed out in his recent Reality Check on Greece, '1.3 million Greeks are out of work, some 400,000 families have
nobody earning an income, about 300,000 workers have employers which have
not paid them for months, hundreds of thousands who have work but are
finding it difficult to make ends meet and numerous young people who see
their future away from Greece'. A huge success that seems to be! Or not?

Yes, it looks a bit different from the standpoint of international creditors. Given that Greece has reached a primary surplus, the government will not need any Fresh Money for its operations (for interest and maturity payments it will). When this happens in a country which, only a year ago, was described as a hopeless bottomless pit, it certainly has a positive impact on confidence.

It is certainly a plus for Greece to have regained international confidence. Investors start taking an interest in putting money into Greek banks and corporations. That is certainly a lot better than having international investors pull back every money they can pull back. But does that really have an impact on the underlying, that is the real Greek economy? I doubt it very much! If the underlying continues to be bad but regained confidence pours new money into it, it only increases losses which will have to be taken in the future. A repeat of the Euro-experience.

Let me, once again, state my definition of what 'success' means in the case of Greece. In one sentence: it means new job creation in the private sector. I don't think there is anyone in this world who would argue that Greece's unemployment should be turned around by creating new jobs in the public sector. Given that, and given that new jobs MUST be created, it can only happen in the private sector. And as regards new job creation in the private sector, I state, once again, that it has to come through import substitution and export expansion, both with a heavy emphasis on foreign investment.

Now, here comes a little surprise. I came across an acticle which states that New Hirings in Private Sector Jumped to Highest level since 2008. What?!? That can't be true! If it were, it would have caused headlines all over the place and it didn't. Perhaps the facts of this article are wrong but I will state them, nevertheless.

From January-May 2013, the article states, 76.193 new jobs (net) came into existence in the private sector compared with a figure of 9.129 in the previous year. The net is composed of 368.853 new hirings (up 21% from the previous year!) and 292.659 firings. The month of May was the trigger because 55.927 net new jobs out of the YTD total of 76.193 were created in that month.

Now, one would think that such a development would fill the front pages of newspapers and the content of blogs and tweets. One would expect that there would be a lot of analysis of that development. Is it a one-off lucky punch or is it the beginning of a new trend? Or rather: what were the reasons behind that development? As for myself, I haven't read anything about that anywhere.

Personally, I get more pessimistic as time goes on. Greece has allegedly been on a radical turn-around path for over 3 years by now (4-5 years by different counts). After such a long period and after so much economic retrenchment, I would expect very significant signals that light at the end of the tunnel is in sight. I would expect new spirits taking root. And what do I see? I see passivity all over the place. Yes, life is brutal but that's the way it is. Full stop!

When a 'normal economy' records the kind of negative facts which I have referred to at the beginning (unemployment, etc.), one would see misery all over the place. The unemployment figures for even the worst areas of the US are much less dramatic than the Greek figures and, yet, when visiting those worst areas of the US, the casual observer sees complete misery. The casual observer may see complete misery in very selected areas of Greece but he does not see complete misery all over Greece. This can only mean that, as one of my neighbors told me, 'Greece is still living off the fat and there is a lot of fat left'. Ok, so that makes the overall situation a bit more bearable. But what happens when the rest of that 'fat' is gone?

My Greek friends tell me that there is plenty of 'fat' left. They concede that the 'fat' is limited to only a part of the population but that part, according to my neighbors, is quite large.'Living off the fat' can be a very dangerous proposition because it creates the illusion that things are not as bad as they seem. In my opinion, the real Greek economy continues in a terrible situation as regards the famous 'ease of doing business'. If there are not, any time soon, real proofs that the ease of doing business in Greece is dramatically improved, 'living off the fat' will later be interpreted as having been the major reason why Greece could not 'turn the corner'.

Monday, June 3, 2013

On
February 4th, 2013, Vladimir Putin, the Russian president, addressed the Duma,
(Russian Parliament), and gave a speech about the tensions with minorities in
Russia:

"In
Russia live Russians. Any minority, from anywhere, if it wants to live in
Russia, to work and eat in Russia, should speak Russian, and should respect the
Russian laws. If they prefer Sharia Law, then we advise them to go to those
places where that's the state law. Russia does not need minorities. Minorities
need Russia, and we will not grant them special privileges, or try to change
our laws to fit their desires, no matter how loud they yell 'discrimination'.
We better learn from the suicides of America, England, Holland and France, if
we are to survive as a nation. The Russian customs and traditions are not
compatible with the lack of culture or the primitive ways of most minorities.
When this honourable legislative body thinks of creating new laws, it should
have in mind the national interest first, observing that the minorities are not
Russians".

I
wonder what would happen if a Greek politician substituted 'Greece' and 'Greek'
for 'Russia' and 'Russians' and gave that speech in parliament?